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This paper highlights a number of examples where notional amount outstanding is used in derivatives regulations in different jurisdictions. In some instances, such as those related to trade size, notional amount may be the most appropriate metric to use. In others, such as clearing and margin, a risk-based measure would be more appropriate.
The CFTC’s Office of the Chief Economist has taken an important step forward with the introduction of the concept of ENNs. Market participants are looking to extend this work and apply it beyond the interest rate space to cover other derivatives asset classes.
While this paper does not propose alternative metrics for derivatives regulations, it identifies the predominant use of notional amount outstanding by regulators, and informs the discussion about whether the use of notional amount thresholds is appropriate for regulations that are intended to address risk.